GDP in Q4 was +4% and for Q1 the Atlanta Fed GDPNow estimate is +8% which is strong growth. Their estimate may prove a little too strong given the polar vortex in mid Fed. and the Covid spike in February. The Covid spike has come down, but I worry a bit about the new variants that are more transmissible. We're in a race with the vaccine. The Fed meeting ended with Powell being dovish, but the bond market pushed up longer dated maturities. The stock market is more likely to respond to the longer end of the curve, so the Fed may buy longer dated bonds to blunt the advance. The 12 month trailing earnings GAAP PE is still 42 which is dangerously overvalued, but in fairness it is at its worst, encompassing four rotten quarters. When I look at forward PE's, I see guesses ranging from 19, 21 and Standard and Poors is at 24. If you can make up an earnings number for the 12 months ahead, then you can make the PE be anything you want. Whose forward earnings guess are they using, S&P, Factset, JP Morgan, Goldman Sachs? Everyone has a guess, and none have any more credibility than the next. But you know what, they ALL show the market is overvalued on a PE basis, and as the five and ten year treasuries rise, in discounted cash flow analysis, the calculated market multiple contracts. Eventually there will be a reversion to the mean, but how it is accomplished, we don't know. Earnings could go up, or stock prices can come down, or both. I suspect that is a way off. Factset estimates that earnings in each quarter of 2021 will be about 20% above the corresponding 2020 quarter, except in Q2 they will be significantly higher because Q2 2020 was so bad. But, those earnings will only get us back to 2019 levels. It is possible that 2021 could be a year of anemic returns since stock prices in 2020 seemed to price in the recovery already. That would be a rational response in my opinion, but the stock market is not always rational. Technically the ten year chart of the S&P looks good, but the price action is up at the top of the channel, bringing into question whether it can push above the top of the long term trend.
All indications are that we remain in a bull market, but one that is richly valued.